1

The Honorable James M. Rosenbaum, United States District

Judge for the District of Minnesota, sitting by designation.

 

Nos. 95-3821/3929

 

Rail Intermodal Specialists, *

Inc., an Iowa Corporation *

formerly known as CC&P *

Intermodal Corporation, *

*

 Appellee/Cross-Appellant, *

* Appeal from the United States

 v. * District Court for the 

 * Northern District of

* Iowa.

General Electric Capital *

Corporation, a New York *

Corporation formerly known *

as General Electric Credit *

Corporation, *

*

 Appellant/Cross-Appellee. *

 

 Submitted: June 10, 1996

 Filed: December 23, 1996 

Before RICHARD S. ARNOLD, Chief Judge, MORRIS SHEPPARD ARNOLD,

Circuit Judge, and ROSENBAUM,1 District Judge. 

MORRIS SHEPPARD ARNOLD, Circuit Judge.

General Electric Capital Corporation ("GECC") appeals from a

judgment entered against it in an action brought by Rail Intermodal

Specialists ("Intermodal") for intentional interference with an

existing contract. GECC asserts that it was entitled to judgment

as a matter of law and asks, in the alternative, for a new trial

due to errors in the district court's instructions to the jury.
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Intermodal cross-appeals from certain evidentiary rulings. The

case, here under our diversity jurisdiction, is governed by Iowa

law. Because we believe that GECC was entitled to judgment as a

matter of law and that the cross-appeal is without merit, we

reverse the judgment of the district court. 

I.

The contract at issue in this case was between Intermodal and

a small railroad company called the Chicago Central and Pacific

Railroad ("CC&P"). CC&P came into existence in December of 1985

when GECC lent John E. Haley $75 million to purchase a rail line

from the Illinois Central Gulf Railroad. Mr. Haley, whose primary

work experience was in real estate and property management, had

first ventured into the railroad business the year before when he

bought the Cedar Valley Railroad, also from the Illinois Central

Gulf Railroad.

Intermodal is a company that brokers the placement of trucks

on flatbed railroad cars. The business moves goods by a

combination of trucking and railroad more cheaply than can be done

by either mode by itself. Thomas Hastings, president of

Intermodal, learned of the impending sale of the railroad to

Mr. Haley through the newspaper, and called him to talk about the

possibility of having Intermodal traffic on CC&P. An agreement

between the two companies followed in December of 1985.

The contract at issue here was not the original one but one

signed the following year. While under the first contract

Intermodal paid an amount directly proportional to the volume of

traffic it ran, under the second contract Intermodal paid a fixed

amount of $6,106 a day for a train dedicated only to Intermodal's

traffic. Under this second contract the revenue to the railroad

was therefore the same whether Intermodal ran one car or a large

train. Mr. Haley testified that he liked the new arrangement
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because it relieved him of his concern about not covering his

overhead during days when there were only a few Intermodal cars.

Intermodal, for its part, felt that the contract was potentially

more profitable. The contract contained a provision that allowed

the parties to negotiate a new rate every three months to ensure

that the contract remained "profitable for both parties." 

CC&P, under Mr. Haley's stewardship, did not fare well.

Within two years, it had become the paradigm of a business very

much in distress: It had a severe cash flow problem; its accounts

payable were overdue by several hundred thousand dollars; it was

unable to make or adhere to financial projections; and its

important personnel were leaving. The business had persistently

failed to meet the financial performance targets set out in the

loan agreement. By July, 1987, it was losing over $1 million a

month. By that time loan payments had stopped, placing the

business in default to GECC.

By September of 1987, GECC had acted on its prerogative under

the loan agreement to audit the business. The audit report

indicated that $8 million to $10 million would be needed to cover

the cash-flow shortfalls expected to occur in the ensuing four

months. The auditors, noting that the railroad's business

comprised three parts -- coal delivery (called the "lifeblood" of

the business), grain delivery, and Intermodal traffic -- found

serious problems with the coal business. They were impressed with

recent increases in revenues from grain shipments. As far as

Intermodal business was concerned, although volume had recently

risen, real revenue growth had been minimal because of the flatrate contract with Intermodal; and the auditors concluded that "a

lot of CCP marketing effort [was] expended in this minimally

profitable area." 
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GECC came to believe that CC&P's fundamental difficulty was a

lack of effective management: One auditor noted that "CCP appears

to be a business without a management system infrastructure";

another auditor noted that he had a "[t]otal lack of confidence in

operating management." GECC therefore acted to remove Mr. Haley

from his position as president of CC&P. A deal was eventually

struck and Mr. Haley left the railroad with a settlement. Don

Wood, an independent consultant who had been hired by GECC to look

into the railroad's operation, was installed as the new chief

executive officer. Mr. Wood's compensation was set out in an

employment contract with CC&P negotiated between him and GECC,

which controlled CC&P's corporate board. In addition, as one GECC

executive testified, there was an understanding that the stock

which GECC had received from Mr. Haley would go to Mr. Wood "if he

did something" with regard to the railroad.

Mr. Wood acted immediately to try to stem the sizable losses

from which the business was suffering, and one object of his

attention was the Intermodal contract. Andrew Lloyd, a GECC

employee who was responsible for monitoring the railroad's loan,

had reviewed the contract and scribbled some notes in the margin of

the contract, including one exhorting someone to "do this now" next

to the provision allowing for periodic readjustments of the price

charged to Intermodal. Mr. Wood made his own notes on the same

contract and later met with Intermodal officials to discuss

adjusting the contract pricing. There was disagreement as to what

the contract allowed, mainly with respect to whether, as Intermodal

insisted, the permissible adjustments to the price were limited to

increases of direct variable costs. 

More meetings were planned, but in the meantime Mr. Wood sent

a letter to Intermodal; the contents of this letter are not in

dispute, but its meaning very much is. The letter stated that

"[i]n order to restore this service to profitability the Daily
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Train Charge ... will be $16,424 per day," almost three times the

existing price. The letter, as an alternative, offered a

consolidated service to Intermodal that represented a similar

increase in costs, and closed with a request for an immediate

response from Intermodal. According to Mr. Wood and GECC, this

letter represented an attempt to negotiate adjustments in the

pricing of the contract in order to make the contract profitable

for the railroad. Intermodal, which says that the new pricing

would have forced it out of business, contends that the letter

itself constituted a breach of the contract. 

After the letter was sent, negotiations between the railroad

and Intermodal broke down. Intermodal halted all payments of any

kind to the railroad, although it did continue to use the

railroad's service. The railroad then filed suit against

Intermodal seeking payment of nearly $1 million; Intermodal

counterclaimed against the railroad for breach of contract. The

parties resolved the lawsuit by executing a mutual release, with no

money changing hands, several months later. 

II.

Iowa's law on the tort of interference with contract adheres

closely to the principles outlined in the Restatement (Second) of

Torts § 766 (1979). Under those principles, Intermodal had the

burden to prove not only that the contract was breached, but also

that the breach was intentionally induced by GECC. Intermodal was

obligated to show, in addition, that GECC's conduct was improper.

For the reasons that follow, we hold that there was insufficient

evidence from which a reasonable jury could have inferred that GECC

induced a breach of contract, assuming that there was one, or that

GECC's conduct was improper. We therefore have no occasion to

decide whether there was sufficient evidence to infer a material

breach of contract.
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A.

Intermodal's argument that GECC intentionally induced a breach

of the relevant contract rests heavily on Mr. Lloyd's note written

in the margin next to the adjustment provision of the contract,

which simply directed someone to "do this now." In addition,

Intermodal makes much of the fact that Mr. Wood had strong ties to

GECC, and that stock in the railroad was held out to him by GECC as

compensation "if he did something" with the railroad. 

First of all, it is difficult to see how the direction to "do

this now" could have been anything other than an exhortation to

someone to take advantage of the adjustment provision in the

contract and to renegotiate the contract in order to place it on a

profitable footing. This seems to us the only reasonable inference

that the marginal note can support. Similarly, the sole reasonable

inference to be drawn from the comment that Mr. Wood would earn the

stock held out to him only "if he did something" has to be that he

had to succeed in the process of turning the railroad around

generally. To infer that by providing an incentive to Mr. Wood

GECC was prompting him to breach the contract with Intermodal is

unreasonable. 

It is important to see that Mr. Wood's interests were the same

as GECC's interests: Each wanted the railroad to survive, because

upon that outcome depended both GECC's hopes of salvaging its

investment and Mr. Wood's hopes of being well compensated (the

stock, of course, would be worthless if the business failed).

Mr. Wood's actions with regard to Intermodal were, of course, done

with the best interests of the railroad in mind, but the fact that

these actions coincidentally promoted the interests of GECC is not

evidence of an intentional inducement to breach a contract on

GECC's part. Whether Mr. Wood believed that the railroad was

breaching the contract one cannot know, although it is at least

conceivable that the railroad was willing to risk a breach (and
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damages) in order to be relieved of its obligations under the

contract. But that is not evidence that GECC induced a breach.

B. 

Proving that GECC's conduct was improper is probably the most

difficult of Intermodal's burdens in this case, not least because

of the confusion that surrounds the term "improper." The

Restatement goes on at some length about the care with which the

term was chosen, and identifies and discusses various other

descriptive words that were discarded along the way because they

carried too much baggage (e.g., unreasonable, unfair, undue,

unjust, and inequitable). At any rate, whether an inducement is

improper, the Restatement tells us, depends on the weighing of a

number of matters, namely, the nature of the actor's conduct, the

actor's motive, the interests of the other with which the actor's

conduct interferes, the interest sought to be advanced by the

actor, the balance between the social interests in protecting the

freedom of action of the actor and the contractual interest of the

other, the proximity or remoteness of the actor's conduct to the

interference, and the relations between the parties. See

Restatement (Second) of Torts § 767 (1979). Iowa courts have

faithfully rehearsed these considerations in dealing with cases

like the one before us. See Water Dev. Co. v. Bd. of Water Works,

488 N.W.2d 158, 161-62 (Iowa 1992), and Toney v. Casey's Gen.

Stores, Inc., 460 N.W.2d 849, 853 (Iowa 1990). What is missing, as

always with lists of this sort, is some formula by which to balance

all of the relevant considerations.

We believe that the core of the tort of interference with

contract can be found in cases in which the defendant lures the

plaintiff's employee away, knowing that the employee has a contract

with the plaintiff that he is breaking by going to work for the

defendant. Lumley v. Gye, 2 El. & Bl. 216, 118 Eng. Rep. 749

(Q.B. 1853). Yet even this core has been controversial, since it
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runs counter to the principle that a party breached against can be

adequately compensated in damages for breach of contract. As to

why a victim of a breach of contract should have a remedy in tort

against a third party, various answers have been offered. One

practical explanation is that a breaching servant is effectively

judgment-proof. A desire to see that somebody pays undoubtedly

serves to keep this tort alive today.

Liability has expanded beyond the predatory model most often,

it seems, to cases in which the action taken is independently

tortious. There are cases involving acts of violence, of fraud,

and of defamation. A colorful illustration of the last is the case

of Am. Sur. Co. v. Schottenbauer, 257 F.2d 6 (8th Cir. 1958), in

which an employee brought an action against a workers' compensation

insurer that had pressured the employer to terminate the employee's

work contract. The insurer believed (mistakenly) that an illness

the worker had contracted on the job was extremely serious and

would require expensive treatment. The worker succeeded in his

claim against the insurer for interference with an existing

contract.

The case before us fits neither of these relatively clear

categories since GECC is not a competitor of Intermodal and the

alleged act of interference is not independently tortious. If we

venture beyond these specific instantiations of the tort we

encounter a great deal of ambiguity. The Restatement, in fact,

notes that "[u]nlike other intentional torts such as intentional

injury to person or property, or defamation, this branch of tort

law has not developed a crystallized set of definite rules as to

the existence or nonexistence of a privilege to act in the manner

stated." Restatement (Second) of Torts § 767 comment b. 

The Iowa courts, however, have provided us with some guidance,

although the litigants debate strenuously the meaning of the
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relevant case law. In Wilkin Elevator v. Bennett State Bank, 522

N.W.2d 57, 62 (Iowa 1994), the court stated that "to establish

improper interference a showing is required that the actor's

predominant purpose was to injure or destroy the plaintiff's

business." Intermodal argues that this case was an anomaly, that

it inexplicably abandoned the distinction that Iowa courts had long

drawn between the tort of interference with an existing contract

and the tort of interference with a prospective contract. Only the

latter tort, Intermodal argues, involves the higher burden, a

burden that Intermodal concededly could not carry. But the recent

case of Berger v. Cas' Feed Store, Inc., 543 N.W.2d 597, 599 (Iowa

1996), decided after the district court entered judgment in this

case, cited Wilkin Elevator approvingly in circumstances in which

the plaintiff claimed an interference with an existing contract.

The court quoted approvingly the portion of Wilkin Elevator that

had held that the plaintiff there had produced "no evidence of a

predominant purpose of causing injury to the plaintiffs," and held

that "a party does not improperly interfere with another's contract

by exercising its own legal rights in protection of its own

financial interests." Id. 

These cases indicate to us that in Iowa the tort of

interference with contract creates, in essence, a cause of action

for unsavory predatory behavior ("predominant purpose to injure or

destroy"), and thus the fact that a defendant was acting to protect

his or her own financial interest is a legal datum relevant to

determining whether he or she was justified in inducing a breach.

Intermodal maintains that GECC had no financial interest in the

contract, but Intermodal itself created an extensive record at

trial aimed at showing that GECC did indeed have such an interest

in order to demonstrate that GECC had the motive to interfere with

the contract. In addition to the audit reports, memos, and minutes

of meetings, there was the marginal note enjoining someone to "do

this now." We think that Intermodal had it right the first time --
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that GECC had an interest in the contract, just as it had an

interest in all aspects of the railroad, as one would expect of a

primary creditor. The awkwardness of Intermodal's argument

derives, we think, from the awkwardness of a tort that is not well

defined. 

We believe, for the reasons already stated, that the Supreme

Court of Iowa would not find liability in a case like the instant

one. We think, moreover, that it would find relevant the fifth of

the considerations that the Restatement identifies as pertinent to

cases like ours. The Restatement invites courts to balance the

social interests in protecting a defendant's freedom of action

against a plaintiff's contractual interest. GECC's conduct might

well have benefited society, because, when one considers the

secondary effects of a large bankruptcy, preventing CC&P from

sliding into insolvency could well have produced a net social good.

Intermodal's interests, moreover, were better served by having a

solvent company with which to do business (or with which to

litigate) than an insolvent one. Accordingly, we find that the

evidence was insufficient to support an inference that GECC acted

improperly under Iowa law.

III.

 We have considered Intermodal's complaints about certain

evidentiary matters and detect no error in the trial court's

rulings.

IV.

For the reasons indicated, we reverse the district court's

denial of judgment for GECC as a matter of law and remand the case

to the district court with directions to enter judgment for GECC.

RICHARD S. ARNOLD, Chief Judge, concurs in the judgment and

joins Part II. A. of the Court's opinion.
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A true copy.

Attest:

 CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.